TED Case Studies

Venezuela Gas Dispute

Case Number: 130
Case Mnemonic: VENEZ
Case Name: Venezuela-US Gasoline Dispute
A. IDENTIFICATION
1. The Issue
The Venezuelan government accused the United States of
discriminating against its products when the Congress passed a bill
requiring that Petróleos de Venezuela, S.A. (PdVSA) oil exports
meet U.S. pollution control standards. According to the U.S. law,
Venezuelan oil must be reformulated to reduce car pollution, just
like domestic oil. The Clean Air Act of 1990 mandates that oil
refiners reduce the levels of the smog-causing olefins by 1995, but
allows a three year grace period for domestic refining companies.
Environmental organizations and American oil refiners teamed up to
ensure that oil importers would be held to more stringent
regulations. Venezuela brought its case to the GATT because the
United States refused to shift its policy on oil imports.
2. Description
Oil exploitation and export has played a paramount role in the
development of Venezuela's economy for years. By the 1930's,
foreign ownership dominated the country's petroleum industry and
influenced its domestic oil policies. Because Venezuelan
policymakers increasingly became alarmed about the foreign control
of their oil industry they began regulating it in the 1940's. In
1958 Venezuelan oil minister Pérez Alfonso increased the government
take of company profits to about 67 percent, a move that sent
shockwaves through the oil industry in the country. The country
did not nationalize their oil industry until January 1, 1976. When
the Venezuelan government nationalized oil production, it did not
take over the fourteen firms; instead it coordinated and
consolidated them and then created PdVSA. Since the oil industry
comprises a large part of the Venezuelan economy, many Venezuelans
are employed by PdVSA both domestically and abroad.
Venezuela became increasingly dependent upon its oil revenues
in the 1970's and 1980's. Though Petróleos de Venezuela (PdVSA)
continued to drill and export their petroleum resources, the export
of this product alone was not enough to develop and sustain the
Venezuelan economy. Between 1968 and 1983 Venezuela's per capita
income grew only 1.5 percent per year, which was only forty-two
percent as large as that of other middle-income nations. By 1982,
oil provided almost two-thirds of the government's income and
ninety-four percent of its export receipts.
The United States has been important to Venezuela as an
importer of large quantities of its oil and as a supplier of the
technology it required to raise its oil industry output. In 1958,
foreign capital comprised 15 percent of total industrial investment
(in all sectors). By 1977, about 50 percent of all large firms
in Venezuela had some type of ties with U.S. private capital.
Venezuela's dependency on U.S. capital has increased considerably
since then.
In September, 1993, PdVSA announced a five-year environmental
protection plan that it estimates will cost about $US 800 million.
The environmental measures, which are much more stringent than
those of other Latin American countries, are required by
Venezuela's Penal Environmental Law. The plan includes monetary
allotments for atmospheric emissions control, treatment and
disposal of solid and toxic waste, treatment of industrial waste-
water, treatment of oil-tainted residues, contingency plans for oil
spills and other emergencies, and for environmental impact studies
(See Table A). Even after instituting these measures, Venezuela's
environmental standards still fall below those of the United
States.
Venezuelan petroleum export officials clashed with the
leadership of U.S. oil companies and environmental groups in 1993
when Petróleos de Venezuela asked to ship gasoline to New York that
contained high levels of a smog-producing chemical. The issue
became a particularly hot topic because the Clean Air Act of 1993
mandated that domestic refiners must limit the level smog-causing
chemicals, known as olefins, to 9.2 percent by 1995. The
Venezuelan oil company wanted to sell gasoline with levels of up to
29.9 percent of olefins.
The executives of U.S. oil refineries were infuriated about
the possibility that Venezuela might be able to slip through a
loophole of a regulation that cost them at least $150 million for
each to comply. Environmental groups adamantly opposed the import
of Venezuela's petroleum because they feared that the olefins in it
would contribute to the formation of toxic nitrogen oxides. After
the Environmental Protection Agency decided to allow Venezuela to
sell gas under the same standards as US refiners, the US oil
industry lobbied Congress to revolt.
A bill that Congress passed in September, 1994 overruled the
EPA's decision and forced Venezuelan-refined gas to meet the same
reformulations standards as U.S. companies. Officials of
Venezuela's state-owned oil company objected and filed a complaint
with the Secretariat of the General Agreement on Trade and Tariffs
(GATT), claiming that the US was using environmental rules to gain
an unfair and discriminatory trade advantage. Petróleos de
Venezuela (PdVSA) estimated that the law would cost Venezuela $150
million in lost sales to the U.S. Congressmen responded to their
charge, say that Venezuela must comply with U.S. laws if it wants
to sell their product in the United States (see Table 130-1).

TABLE 130-1

Money To Be Spent by Petróleos de Venezuela, S.A. For Environmental
Protection Plan (1993-98)

Venezuela's (and Brazil's) case was upheld by a World Trade
Organization Panel in February, 1996, in the first case brought
before the body. It ruled that the standards were discriminatory
against foreign producers and that "more stringent quality
requirements for imported gasoline were not necessary to improve
environmental conditions."(1) The United States appealed the
verdict.
3. Related Cases
ECUADOR case
KOMI case
OGONI case
CLEAN case
KAZAKH case
Keyword Clusters
(1) :Trade Product : = OILGAS
(2) :Bio-Geography : = VARIES
(3) :Environmental Problem: = Air [POLA]
For Related issues, see Trade and Export Database cases
ECUADOR, EXXON, SHET, VENEZ, NOROIL, ALASKA, SUPER, CLEAN.
SUPER and CLEAN cases are particularly relevant to this issue.
4. Draft Authors: Jay Krasnow (December,
1996) and Leyla Demirel
(May, 1995); Updated
(March, 1996)
B. LEGAL CLUSTER
5. Discourse and Status: DISagree and COMPlete
AT a GATT meeting prior to the decision Venezuelan Energy and
Mines Minister Erwin Arrieta said his delegation would not back
down on the issue. "It's a matter of principle," explained
Arrieta.
6. Forum and Scope: GATT (WTO) and MULTIlateral
Though this particular case focuses on PdVSA's dispute with
U.S. policymakers for their law, Venezuela has brought their
complaint to GATT. This case has the potential to influence many
other nations that export oil to the United States. Mexico has
already issued similar complaints that the U.S. law is
discriminatory.
7. Decision Breadth: 111
On the surface, the dispute was between U.S. domestic law and
Venezuelan trade practice, but the dispute could potentially impact
other GATT members. Though 123 nations are signatories to the
GATT, nations that export oil to the U.S. would be most concerned
about the conflict between the two countries. Since both the U.S.
and Venezuela are signatories to the GATT, Venezuela had a forum to
voice its complaint. Any oil-exporting nation that has not joined
the GATT would not be able file a complaint against the U.S. if
they felt this trade practice was unfair. Other nations that do
not export oil might be concerned if they felt the U.S. law
demonstrated a 'bad tendency' that could spread to other realms of
trade. While environmental organizations protested against the
import of the Venezuelan oil, U.S. oil refiners formed one of the
groups that has had the greatest economic concerns about the case.
One Sun spokesman estimated that the company would need to spend at
least $150 million to comply with the regulation and felt that it
would be unfair if Venezuela were granted an exception. If
Venezuela decided to boycott the U.S., then American consumers
would pay higher prices for gasoline.
8. Legal Standing: TREATY
PdVSA have resorted to the GATT's arbitration council to
attempt to settle this dispute.
C. GEOGRAPHIC FILTERS
9. Geography
Geographic Domain: North America
Geographic Site: North East
Geographic Impact: The United States
10. Sub-National Factors: NO
11. Type of Habitat: TROPical
D. TRADE FILTERS
12. Type of Measure: Regulatory Standard [REGSTD]
The U.S. law does not bar Venezuelan oil. It instead requires
that PdVSA meet the same regulatory standards as U.S. producers,
but gives them a shorter period of time to do it. According to the
Clean Air Act, U.S. oil producers must lower the level of olefins
to 9.2 percent by 1995. The dispute focuses on Venezuelan
gasoline, which had levels of olefins of up to 29.9 percent.
13. Direct vs. Indirect Impacts: INDIRect
The impact of the measure is indirect because the case invoked
the measures of an environmental law, which in turn had trade
impacts.
14. Relation of Measure to Impact
Directly Related to Product: YES - OILGAS
Indirectly Related to Product: YES - AUTO
Not Related to Product: NO
Related to Process: YES - POLA
15. Trade Production Identification: OIL
16. Economic Data
The petroleum industry is particularly important to Venezuela
because a large amount of the country's output comes directly from
it. In 1992, the industry accounted for one-fifth of Venezuela's
gross national product (GNP), two-thirds of the central
government's revenues, and four-fifths of their export earnings.
The net inflow of foreign exchange to was $US12 billion.
Venezuela's industry produced an average of 2.334 million barrels
per day of crude petroleum and 37,000 barrels per day of
condensates that year. The total amount of petroleum exports from
Venezuela averaged 2.1 million barrels per day in 1992. The price
of Venezuelan oil in 1992 was $US14.91 per barrel, but that price
fell to $13.40 per barrel in 1993 (based on the first eleven months
of the year). Venezuela's conventional crude reserves rose by 680
million barrels to 63.33 billion barrels as compared to 29.329
billion barrels in 1985. PDVSA is currently participating in joint
ventures in Illinois, Germany, and Sweden. Future joint projects
may include ones with Conoco of the United States and Itochu/
Marvbeni of Japan. Some reports have concluded that the petroleum
industry generated half of the 10.4 percent growth rate posted by
the Venezuelan economy in 1991 (See Table 130-2).

17. Degree of Competitive Output: HIGH
18. Industry Sector: OILGAS
19. Exporters and Importers: VENEZuela and USA
By far, the United States is the largest importer of
Venezuelan oil. The U.S. alone purchases at least 65 percent of
the Venezuelan oil exports. Venezuelan oil exports have found
their way to Latin American nations including Brazil and other
nations around the globe. In fact, Venezuela overtook Saudi
Arabia as the top exporter of petroleum to the U.S. in first five
months of 1995. From January to May 1995 Venezuela exported 1.43
million b/d of petroleum to the U.S., but Saudi Arabia only
exported 1.34 million b/d to the United States during that same
period. United States receives 16.8% of its oil from Venezuela and
15.7% of its oil from Saudi Arabia. This raise in U.S.
dependency on Venezuelan petroleum is in part due American
importers' concern about recent price hikes in Mexico and Middle
Eastern countries since 1994. Table 130-3 breaks down
Venezuela■s crude oil export by geographic area:
Table 130-3
Exports of Crude Oil and Refined Products by Geographical Area
(Thousands of barrels per Day)
Region 1992 1993 Percentage of exports
U.S. and
Canada 1,341 1,503 69.3%Central Amer./
Caribbean
350 340 15.7%Europe 241 195 9.0%South America 69 80 3.7%Japan 6 8 0.3%Others* 47 44 2.0%Total 2,054 2,170 100.0%*Includes bunkers
Data collected from Petróleos de Venezuela, S.A. Annual Report 1993
(Venezuela: PDVSA, 1994), 25.
E. ENVIRONMENTAL FILTERS
20. Environmental Problem Type: Air [POLA]
The potential impact of the Venezuelan oil on our environment
is enormous. Already New York City (where the Venezuelan oil
arrived), Philadelphia, and several other American cities are
blanketed with smog. Since the olefin levels in Venezuela's
petroleum is more than three times higher than the level permitted
in domestic oil, it would be much more dangerous to the communities
that use it and would contribute to global warming and ozone loss
at a higher level than domestic oil in the United States.
21. Species:
The species in danger depend on which part of the United
States the Venezuelan petroleum is used.
22. Impact and Effect: LOW and REGULatory
23. Urgency and Lifetime: LOW and 100s of years
24. Substitute: YES
Scientists have adapted technology to create electric and
solar cars but these automobiles are not widely used because they
are inefficient, expensive, or dangerous. Industries that are
dependent on oil would reject other environmentally friendly energy
sources because it would be expensive for them to switch fuels.
The reasonable substitute for the Venezuelan oil would be American
oil that meets the standards of the Clean Air Act or oil from other
countries that do meet U.S. standards.
F. OTHER FACTORS
25. Culture: NO
26. Human Rights: YES
The high levels of olefins in the Venezuelan petroleum are not
only a threat to the environment in the United States, but also
could jeopardize the health of the people living in the areas where
it's used. The health impact of petroleum with high olefin levels
is tremendous. According to the U.S. Environmental Protection
Agency, motor vehicles emit 75-90% of the carbon monoxide in the
air, about half the harmful ozone-forming hydrocarbons and half the
airborne particles. The olefin levels of the Venezuelan oil may
be three times higher than what is allowed at domestic refiners.
According to then-chairman of the Senate Environment and Public
Works Committee Max Baucus (D-MT), "Olefins increase NOx emissions
and have strong ozone-forming potential.
27. Transborder Issues: NO
28. Relevant Literature
Black, Jan Knippers, ed. Latin America: Its Problems and Promise:
A Multidisciplinary Introduction, 2nd edition. Boulder,
Colorado: Westview Press, 1991
Boué, Juan Carlos. Venezuela: The Political Economy of Oil.
Oxford: Oxford University Press, 193.
Burns, E. Bradford. Latin America: A Concise Interpretive History,
5th ed., New Jersey: Prentice Hall, 1990
Elass, Jareer, "Oil tankers sail past COFR deadline, but rough seas
may be on the horizon; certificates of financial
responsibility", The Oil Daily 29 Dec. 1994: 1.
Financial Times, "U.S. Appeals over WTO Ruling on Petrol,"
February 22, 1996.
Journal of Commerce, "U.S. Appeals Trade Panel's Ruling Against
Clean-Gasoline Rules," February 22, 1996.
LaFranchi, Howard, "Venezuela Poised to Open Oil Fields to
Foreigners," Christian Science Monitor 7 Apr. 1995, 8:1.
Lavelle, Marianne, "GATT Complaint Fouls Feds' Clean Air Oil Deal,"
National Law Journal 13 June 1994: 81-3.
Randall, Laura. The Political Economy of Venezuelan Oil. New York:
Praeger, 1987.
"Tanker troubles; liability for oil spills frightens oil
companies," Petroleum Economist May 1991: 4.
"Venezuela oil company announces five-year environmental plan,"
Environment Watch Latin America Sept. 1993: no page provided.
"Venezuela-oil gas industry profile," 1994 National Trade Data Bank
Market Reports. 16 Feb. 1994: no page provided
References
1. Journal of Commerce, "U.S. Appeals Trade Panel's Ruling
Against Clean-Gasoline Rules," February 22, 1996.